Interview Guides
You are reviewing a quarterly risk memo for a mid-sized global asset manager with material USD and EUR cash flows. Your CFO wants you to explain whether a new contract is a derivative, what economic exposure it creates, and how it would affect earnings if FX moves. The team has provided the contract terms and two exchange-rate scenarios, but no valuation model.
| Metric | Value |
|---|---|
| Notional amount | EUR 10,000,000 |
| Contract type | 3-month forward to buy EUR / sell USD |
| Forward rate agreed | 1.08 USD per EUR |
| Spot rate at inception | 1.05 USD per EUR |
| Spot rate at maturity - base case | 1.10 USD per EUR |
| Spot rate at maturity - downside case | 1.18 USD per EUR |
| USD cash needed in 3 months | USD 10,800,000 |
| Hedged exposure percentage | 100% |
How would you explain what this derivative is, whether it is being used for hedging or speculation, and what the USD P&L impact would be under the base and downside FX scenarios?
